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Hospital Stocks - Best Hospital Stocks to Buy

Posted on Thursday, November 14th, 2019 by MarketBeat Staff

doctors busy preparing for surgery

The healthcare industry as a whole has historically grown steadily. Due to an aging population and many technological advances, it seems unlikely that this growth will be slowing down any time soon. A major segment of this growing industry is healthcare providers, such as hospitals.

Top Hospital Companies in the World

For those looking to invest in healthcare, it’s a good idea to become familiar with the hospital industry. A look into some of the biggest hospitals can shed a lot of light on top hospital stocks.

Hospital Industry

The healthcare industry is massive and continues to grow at a steady pace. Some of the biggest stock gainers and some of the best growth stocks are in the healthcare industry. Along with many insurers, hospitals have been doing quite well. In 2017, hospital profits reached $88 billion. This is 12.5% more than in 2016 and 27% more than in 2013. Many of the factors that affect the healthcare industry as a whole, such as technological advances and an aging population, also affect the hospital industry. But there are a few unique advantages and challenges that come with hospitals.

One of the challenges that hospitals face is that they operate in an environment with high fixed costs. But in an environment like an emergency room, hospitals cannot turn away patients, and these profit-loss centers can cause hospitals to incur significant debt expenses. On the other hand, long-term care facilities and surgery centers have for-profit business models with lower fixed costs and almost nonexistent “bad” debt.

Even though the hospital industry is highly competitive and has high fixed costs, historically, the industry has seen steady growth. This growth is largely due to government assistance and reimbursements. Most hospitals in the United States are “not for profit.” The government will often keep them afloat—especially those in more rural areas— in order to make sure people have access to medical care. The reimbursement rate from special insurers like Medicare is usually sufficient to keep hospitals from having to close. Due to this connection between Medicare insurance and hospitals, stock prices of hospitals are tied largely to the Medicare reimbursements. When changes are made to Medicare payments, it often affects the profit a hospital is able to earn.

Top Hospital Companies in the World

Based in Nashville, TN, HCA is one of the largest operators of for-profit hospitals in the United States. In 2019, the stock has seen some volatility due to concerns over the 2020 election. If “Medicare For All” legislation was to pass—a measure that many democratic presidential candidates have proposed—it would likely have a negative effect on HCA. That’s because even though it offers low discount prices to major organizations, such as UnitedHealth Group, the prices the government gets are even lower. Another factor that may affect HCA is its recent investment in telemedicine.

HCA’s third-quarter report showed strong volume growth, with a 6% increase in admissions. HCA has been working on growing its capacity by increasing its network of ambulances and adding more clinical technology for its physicians. These investments are starting to pay off for HCA and the company allows shareholders to cash in on its success through dividends.

Fresenius is a health care group with a large international presence. Many hospital stocks are focused on the United States, but Fresenius is based in Germany and has hospitals all over the world. The company’s revenue is equally split between Europe and North America. Specifically, 43% of revenue comes from Europe and 42% is generated in North America. The remainder of the revenue comes largely from Asian countries. Fresenius’s diversification is not only geographic—the company has excelled at diversification in its business model as well. Fresenius produces hospital and dialysis supplies, operates various hospitals, and provides other hospitals with various healthcare services and projects.

For those with a dividend investing strategy looking to invest in hospitals, Fresenius may be a good option. The company has increased its dividend payment for the last 26 consecutive years. The company’s stock price took a dip in 2017 and 2018, but this means it may currently be a good value for investors. Fresenius has four segments of its company: Fresenius Medical Care, Fresenius Kabi, Fresenius Helios, and Fresenius Vamed. Fresenius Helios is the division that operates hospitals and is the largest private hospital and medical center operator in Europe.

Universal Health Services (UHS) is a Fortune 500 company that owns and operates different types of care facilities, including facilities in the acute care segment of healthcare, as well as in the behavioral health services side. In 2018, Universal Health’s revenue was $10.77 billion, and it looks like the company has more room to grow.

The company’s revenue for the third quarter of 2019 was $2.8 billion, an improvement over the $2.6 billion in revenue from the same quarter of the previous year. UHS does have a decent amount of debt on its balance sheet (over $4 billion). Debt is not necessarily bad but is often correlated with higher risk. The debt load of a company is usually viewed in relation to its earnings power—which is how easily the company could earn enough money to cover its debts. UHS appears to have enough earnings power to pay off its debt, which means the risk of debt is not nearly as high as it may seem.

Encompass Health works in both facility-based and home-based healthcare. Encompass Health saw strong growth in both revenue and volume for the third quarter of 2019. The volume growth came from the home health and hospice services section, while the revenue growth came partly from more volume and higher pricing in the inpatient rehabilitation and mental health sections. The revenue growth also came from the company’s recent acquisition of Alacare Home Health and Hospice. Though Encompass Health has had many positive signs of financial health in its third-quarter earnings report, it also had a few potential areas of concern, the largest of which was that its cash flow numbers fell by 42%. The company has said that this drop in cash flow was caused by an increase in working capital. This is not necessarily a bad thing, but it is something worth closely watching.

In 2018, Apollo Global Management bought out LifePoint Health (formerly known as LifePoint Hospitals). Since the buyout, LifePoint Health is no longer publicly traded, but the company is still a major player in the healthcare space and is worth knowing. What makes LifePoint Health unique is that it focuses on hospitals in more rural areas of the United States. Like many other hospitals in the healthcare providing sector, LifePoint has seen an increase in volume since the passing of the Affordable Care Act (ACA). Also known as Obamacare, the government program has led to more people having health insurance and taking advantage of health services offered by insurers. This increase in volume has been seen across the board, from admissions and surgeries to visits to the emergency room. Though the core business of LifePoint is hospitals, the company also works in other areas of healthcare, including nursing homes and assisted living facilities.

DaVita has a history of acquiring other companies in the healthcare market. The most notable of these was in 2012 when DaVita acquired HCP for $4.4 billion and became DaVita HealthCare Partners. The company also acquired Colorado Springs Health Partners in 2014 and the Everett Clinic Medical Group in 2016. DaVita Healthcare Partners saw $2.9 billion in revenue in the third quarter of 2019, a two percent increase over the same quarter in 2018. DaVita Healthcare Partners may not be a giant among the entire healthcare industry, but it is still a company worth watching. DaVita Healthcare Partners has the potential to outpace many of its larger healthcare competitors.

In early 2019, Dignity Health and Catholic Health Initiatives merged to become CommonSpirit Health. CommonSpirit Health has over 700 care sites and 142 hospitals in 21 states. The company also has a social services network and a population health network. The two Catholic health systems emphasize care to lower-income earners. The merger has created some struggles for the company. The company’s second quarter saw a loss of $222 million. The third quarter also saw a loss of revenue—$7.26 billion as opposed to $7.32 billion from the same quarter of the previous year.

Hospital ETFs

The hospital industry is an area of the stock market that shows a lot of potential, but it can be difficult to know which stocks to choose. This is where ETFs can help. Since an ETF is one investment made up of multiple securities, it allows you to invest in the top hospital stocks without having to figure out all the individual stocks to buy. For those that are new to the hospital industry, a hospital ETF may be a good choice. There are plenty of healthcare ETFs available, but most of these healthcare stocks are invested across the healthcare sector, as opposed to focusing exclusively on hospital stocks.

For some investors, a more diversified healthcare ETF may be appropriate, but for those looking to invest specifically in hospitals, it’s important to note that hospitals are only a small segment of the overall healthcare industry. This means that a healthcare ETF may have little to no exposure to hospital stocks. One ETF that is focused on healthcare providers, such as hospitals, is the iShares US Healthcare Providers ETF (IHF).

Should I Invest in Hospital Stocks?

Healthcare stocks are big right now and are some of the most active stocks monitored by traders. For those looking to invest in this growing market, hospital stocks may be a good place to start. The industry shows a lot of potential, due to technological advances, an aging population, and even a perceived mental health crisis related to gun violence. However, there are also plenty of factors that may have a major impact on the industry, such as regulations that affect health plans, coverage, insurance companies, and whether the government might repeal the Affordable Care Act (ACA) insurance. These potential concerns do not mean that investors must avoid the industry, it simply means that investors should understand the investments they’re making and ensure that hospital stocks are only a part of their diversified portfolio.

Companies Mentioned in This Article

CompanyCurrent
Price
Price
Change
Dividend
Yield
P/E
Ratio
Consensus
Rating
Consensus
Price Target
HCA Healthcare (HCA)$144.61+2.8%1.11%14.80Buy$157.83
Fresenius Medical Care AG & Co. (FMS)$35.67-2.5%1.26%15.71Hold$47.41
Universal Health Services (UHS)$144.71+2.0%0.55%15.18Buy$150.33
Magellan Health (MGLN)$80.51+4.8%N/A33.00Buy$75.50
Apollo Global Management (APO)$44.65+0.2%4.48%-212.62Buy$45.45
Davita (DVA)$72.70+0.3%N/A20.36Hold$65.00

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